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Inversions May Be the Least of U.S. Corporate Tax Issues

By Christopher Swann July 31, 2014 1:45 pmJuly 31, 2014 1:45 pm

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Windstream provides cloud computing to businesses.Credit Windstream

A couple of home-grown tax breaks in the United States are making inversions look like a diversion. The American authorities are letting Windstream designate its telecommunications cables as real estate, qualifying them for tax breaks. And a partnership will shield assets of the energy firm Hess from the Internal Revenue Service.

Windstream, a provider of cloud computing and other services to businesses, set off a mini-boom in telecom industry stocks on Tuesday after the company revealed it had received permission from the Internal Revenue Service to organize some of its assets into a real estate investment trust. These companies avoid paying corporate tax as long as they distribute at least 90 percent of their earnings as dividends. The S&P Telecom Select Index added 3 percent as investors wagered others might follow suit. Windstream’s own shares jumped as much as 26 percent at one point.

REITs are big business already, but the I.R.S. seems to be widening its definition of what constitutes real estate. And the telecommunications industry is not the only one benefiting. The energy sector has been making a lot more use of the master limited partnership structure recently, with Hess the latest to do so on Wednesday. These structures are exempt from federal income tax. There are now 117 of them worth $570 billion, double their total value three years ago. A record 19 went public last year.

As with REITs, the assets that qualify for master limited partnership status have expanded over the years. The tax exemption was originally intended as a break for those producing or transporting fuel, but the I.R.S. has extended it to service providers – including Hi-Crush Partners, a producer of a specialized sand used in fracking.

M.L.P.s are now expected to cost the country about $7 billion in lost tax revenue from 2012 to 2016, the Joint Committee on Taxation in Congress, calculated in 2013. That was four times the previous year’s estimate. Expanding the definition of REITs potentially adds to that figure, suggesting these structures cost more than the lost revenue from firms moving overseas in search of lower tax rates. The White House recently estimated that loss at $17 billion over a decade.

It may be politically easier for politicians to tolerate tax breaks that benefit domestic constituents rather than to surrender federal revenue. But narrowing the rules for M.L.P.s and REITs could make for a much simpler fix.

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Inversion Shame Is Gone

David Gelles, a reporter for DealBook, says that dozens or more tax inversion deals are possible this year and it is unlikely Congress will act.